UBS write-downs could double

Andrew Hurst
16 Feb 08

Swiss bank UBS could face billions of dollars more in subprime-related write-downs in 2008, which could tip it into a second year of losses, analysts warned investors, sending its shares tumbling again.

Some said UBS might be only halfway through clearing the debris from the subprime loan disaster that has already saddled it with $18 billion in charges in 2007.

The prognosis knocked UBS shares down 5.93 percent to 35.24 francs by 1130 GMT on Friday, a day after falling 8 percent on the news that the company had at least $80 billion in exposure to subprime loans and other risky debt, nearly three times more than it had previously disclosed.

“The disaster is much worse than we had thought,” said Dirk Becker, analyst at Landsbanki Kepler in Frankfurt. “It looks like they face another very bad year, and a loss for 2008 is not inconceivable.”

Equity analysts at Citigroup said UBS might have to spend 12 to 20 billion Swiss francs on additional write-downs.

Others, including Lehman Brothers, which tallied UBS’s exposures at $97.3 billion, said a write-down of 10 billion francs was on the cards.

“A further 10 billion Sfr write-down would eliminate all profit for 2008, which would likely be a negative for the stock price,” said Lehman in a note.

A UBS spokesman said on Friday “our exposures are disclosed”, but declined to comment on speculation of more write-downs.

“If your starting point for exposures is an $80 billion number, then it is not off the wall to think that a quarter of that could be in trouble,” said one analyst with an investment bank who asked not to be identified.

The Swiss bank, the world’s largest manager of affluent people’s money, is already Europe’s biggest casualty of the credit crunch by far.

It has replaced nearly all its top management and watched its share price more than halve since June, when the force of the subprime crisis began to register.

What next?

Analysts said they were exasperated with some of UBS’s unexpected disclosures on Thursday, including an $11.2 billion net exposure to a complex structured credit called a reference-linked note program.

“Will another position come out? What’s next? This is the worry,” said Andreas Venditti, an analyst at ZKB in Zurich.

More write-downs could spell trouble for UBS’s plans to bolster capital with a 13 billion franc injection from Singapore and an unnamed Middle East investor. The plans are due to be put to a shareholder vote at an extraordinary meeting on February 27.

The two investors will take a stake in UBS by subscribing to a mandatory note that is convertible into the bank’s stock.

Even if the capital injection is approved, UBS might have to contemplate a rights issue, unless it can keep new write-downs to no more than 10 billion francs and spread the losses over the year, rather than take a huge charge in a single quarter.

Larger losses would push its tier 1 capital ratio below 10 percent, a level that analysts say is critical for the bank to maintain its profile as a top-flight wealth manager and investment bank.

“We believe it has sufficient additional capital to absorb further write-downs without further recourse to a further capital injection,” said Lehman.

Lehman said it based its assumption on the capital injection going through, which would give the bank 6-7 billion francs of excess capital, and on UBS making net profits of 9 billion francs in 2008, excluding any charges from write-downs.

Reporting by Andrew Hurst, additional reporting by Thomas Atkins, editing by Will Waterman

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